Colgate–Palmolive India Limited, Buy

Colgate–Palmolive India Limited, Buy

CMP - Rs. 395, 12M Target Price – Rs. 470

Reduction of Share Capital

CPIL has announced “Reduction of Capital” under Section 100 of the Companies Act which will reduce the par value of shares from Rs. 10 to Re. 1 though the number of shares will remain unchanged @ 13.6 cr. The Share Capital will reduce from Rs. 136 Cr. to Rs. 13.6 Cr and there will be a payback Rs.9/Share to each shareholder (total Rs. 122.4 Cr). This payback to shareholders is construed as a “Deemed Dividend” under Section 2 (22) of the Income Tax Act. The company will pay the Dividend Distribution Tax @ 17% = Rs.20.8 Cr and the receipt of Rs.9/Share will be tax free in the hands of the Shareholders. The total cash utilized would be Rs.143.2 cr. We believe these gesture reflect on the company’s intention to consistently reward its shareholders.

The closure of the Sewri unit and shifting of manufacturing to Baddi would help in improving margins due to lower incidence of indirect taxes. We expect the EBITDA margin to improve from 16.1% (normalized) in FY07 to 16.8% in FY09.

Financials at a Glance

In Cr Mar'07 Mar'08E Mar'09E

Total Income 1362.1 1561.0 1742.0

PBDIT 217.8 323.6 353.9

PAT 160.2 235.4 271.5

Equity 136.0 136.0 136.0

EPS (Rs.) 15.2 17.3 20.0

Valuations & Recommendation

With the fiscal benefits from the company’s new toothpaste plant in Baddi expected to continue till FY12, CPIL is expected to show strong bottomline growth in the coming quarters. We believe that the revenue growth is also sustainable as a huge rural market is still untapped as rural consumers move from powder to paste. We maintain our positive outlook on the company. At the current market price of Rs.395, the stock is trading at a price/earnings ratio (PER) of 22.8x FY2008E EPS of Rs.17.3 and 19.8x FY2009E EPS of Rs.20.0. We recommend buy on CPIL with a price target of Rs.470, which is a 19% upside from the current levels.

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